In 2014, the Eastern Credit Union board of directors decided to purchase 16 acres of land in Valencia to provide affordable housing for their members.
The credit union paid $5 million for that land.
They then forked out an additional $4 million for some architectural drawings that were said to be for the land.
The problem is it has since been discovered that the drawings had nothing to do with the land.
And as a result, in its most recent financial statement, it was decided that the $4 million would be written off resulting in part in the credit union’s net surplus falling by 75 per cent when compared to the previous year.
A feasibility study on the land has also shown that not even the best housing development option provided for the land will be profitable.
To break even they would have to sell three bedroom houses for $2 million and townhouses for $1.35 million.
The name selected for the development was straightforward enough “Las Viviendas” the Spanish phrase for “The Houses.”
But nothing else with the transaction has been as straightforward.
In his president’s message in the credit union’s 2020 annual report Richard Noray gave the latest twist in the development’s controversial history.
“Finally, the surplus for the year 2020 has been impacted negatively because of several factors. However, we have attributed the dividend decrease majorly to the COVID-19 pandemic and the write off of the architectural drawings cost for the potential housing development known as Las Viviendas,” Noray stated.
“It was quite concerning to learn that the price that was paid for that drawing was almost equivalent to the price Eastern Credit Union paid for the land itself. The reason for the architectural drawings write-off, was partly because a feasibility study commissioned by the Board of Directors concluded that the original drawings could not work on the land and even with adjustments to the original plans there was a low likelihood of a profitable outcome. The auditors therefore, having read the feasibility study, questioned the value attached to the original drawings,” Noray stated.
Noray said that based on the feasibility study and the queries from the auditors the board decided that the cost of the drawings should be written off or charged against the revenue as a loss.
“That reduced ECU’s surplus by the extent of the price paid for the drawings. The net resulting effect of that was the surplus had to be reduced by $4 million dollars. Therefore, the percentage dividends we would have preferred to pay out this year could no longer be paid out,” he stated.
New drawings are now required, according to the financial statement.
A price tag for this has not been revealed as yet.
In January 2016, ECU’s then auditors ruled that following an investigation there were no irregularities in the purchase of Las Viviendas.
ECU’s current auditors are PricewaterhouseCoopers.
In an interview with the Business Guardian earlier this month Noray said he was “hurt” by the entire Las Viviendas ordeal.
“So it was a blow to me but I had to explain to them in the management address that we were compelled to do that because it was the correct thing to do in accounts,” Noray stated.
Last April, Acuitas Caribbean Ltd did a feasibility study on the Las Viviendas project to determine “the highest and best use” of the property.
The definition of highest and best use is as follows: “The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.”
“Acuitas is ISO 9001 certified, and our consultancy services are ‘process driven’ and in compliance with international best practices; therefore, our methodology to establish the basis for determining ‘the highest and best use of the property’ is in keeping with accepted procedures in the industry.”
Acuitas stated that they analysed the feasibility of the project in the context of what is legally permissible, physically possible, financially feasible and most profitable.
“This preliminary feasibility study includes a detailed review of the documents contained in the developer’s project file, a reconnaissance site visit, discussions with representatives of the statutory approval bodies, consultations with real estate brokers, preparation of priced Bills of Approximate Quantities, preparation of profitability spreadsheets and the preparation of a project risk assessment.
“Our analysis shows that only one of the options out of the ten sub-division layouts previously identified by the developer will comply with the current Town and Country Planning Division (TCPD) guidelines and conditions.”
The Acuitas team also added four additional options for consideration all of which they believe will likely obtain TCPD approvals under the same guidelines and conditions.
Option 1: Sub-division layout approved by the TCPD dated 7th July 2010 with a 6,500 square foot lot size.
Option 2: Similar sub-division layout as Option 1, using a smaller lot size of 5,000 square feet for the single-family dwelling units.
Option 3: Sub-division layout with townhouses only.
Option 4: Sub-division layout in accordance with Option 1 but land development (only). No housing units.
Option 5: Sub-division layout in accordance with Option 2 but land development (only). No housing units.
Acuitas stated that the main conclusions arising from its study are that none of the five options identified are profitable.
The best-case scenario according to Acuitas is that Option 3 (Townhouses only) incurs the lowest loss at seven per cent.
Acuitas stated that “densities that are higher than the approved TCPD conditions will improve profitability.”
“The break even point for Option 1 requires unrealistic selling prices,” it stated.
It stated that the overall project risk profile is at a Moderate Risk Severity Level.
“Notwithstanding the conclusion that none of the five options are profitable, there are some valuable ‘lessons learnt’ which arise from the study,” Acuitas stated.
Among those are that the development must be “process driven” in keeping with the standard guidelines accepted internationally for determining the “highest and best use” of the property.
And that the developer should only consider options that first satisfy what is “legally permissible and physically possible”.
“There are profitable scenarios for the project, but these are at significantly higher densities than the current TCPD conditions allow,” it stated.
“From our experience, the TCPD approvals also vary depending on whether the developer is a private sector entity or a public sector entity, such the Housing Development Corporation (HDC). HDC projects tend to be granted approval with higher densities than would typically apply to a private developer.
“We have gathered from the files that the developer was considering a partnership with the HDC and some of the options reflect a higher density, typically enjoyed by the HDC. However, none of these options were formally approved by the TCPD,” Acuitas stated.